The Davos show is beginning this week. I am not going, but I am in Zurich and close enough to see the ads for ever-bigger and better private planes to take the elites to elite places. All of this against a background of calls for inequality.
The problem with addressing inequality is that the rich have convinced themselves that they have fairly earned and fully deserve every penny in their off-shore tax-haven bank accounts, and governments (the enemy, socialist, communist) have no right to raise taxes or change loopholes and rules that strongly favor the continued accumulation of wealth by those who already have most of it.
Famed French economist Thomas Piketty has argued that it is a natural law that the rate of return on capital will exceed overall economic growth rates; as long as that is true those who own capital will get richer compared to those who do not. Hence his only solutions to inequality are to tax the wealth that the rich accumulate, or wait for wars or depressions to destroy that accumulated wealth.
That is a bleak view and wholly unnecessary. One can easily reduce the rate of after-tax returns on capital (which are what matter for accumulation) by legislation. Progressive income taxes PLUS high estate taxes did the trick for decades in the US. High pre-tax incomes were readily allowed, but strongly progressive taxes meant that the higher the additional income the smaller the net gain, which disincentivized the pursuit of astronomical incomes. Simply going back to the tax structure of the 1970s, or even early 1980s, would reduce the extreme inequality from high CEO and financial sector earnings. Then a high estate tax will block the inter-generational transmission of inequality.
Even simpler would be to knock out some of the strange quirks in the tax system that actually enhance the after-tax return to capital. One is the step-up valuations of assets at death, which saves the very rich billions in taxes for no sensible reason (shouldn’t all capital gains be taxed at the same rate? Why give an exemption to capital gains that happen to have not been realized at the time of one’s passing?) Another is the preferential tax treatment given to capital gains, which are taxed at a substantially lower rate than wage earnings. If it is the case, as Piketty argues, that returns on capital tend to be higher than the growth of wages (which are linked to the growth of the overall economy), then to put a much higher marginal tax on wages as well is to create a double-whammy against wage earners, and guarantee an escalation of inequality.
All of this is straightforward and much discussed. But there are other approaches to inequality that do not rest so much on trying to equalize incomes and are far more effective.
It doesn’t matter much to the opportunity and life chances of a child whether their parents eat chicken or beef, whether they drive a Porsche or a Chevrolet, and whether they have antique furniture or shop at IKEA. What does matter is whether that child has an adequate diet of protein and micro-nutrients; fresh air and space to play; access to information; quality preschool and formal education; and medical care to address illnesses and injuries and issues of sight, hearing, or emotional problems.
So what if we let differences in income continue to determine what kind of cuisine, car, and furniture people have. But for things that are really important for child development and opportunity, we should take those things out of the realm where income has a major effect differentiating access. That is, they should be treated like public goods (like police protection and roads) and provided by public authorities — but with more attention to high and uniform levels of quality in their provision than is often the case today.
Of course, the question will be raised — how to pay for those public goods? The answer can be taxes that do not focus mainly on income. They could be provided by taxes on spending — value-added taxes, luxury taxes (on yachts, and cars and homes above a certain capital value), liquor and cigarette taxes, hotel and travel taxes, etc. No one is forced to pay such taxes; they are voluntarily occurred by choices to consume certain goods and services or at a certain level. But they can provide the means to make opportunity-goods available to everyone, and thus avoid the most noxious effects of inequality — that severe inequality closes the doors to future opportunity.
So don’t worry about differences in income inequality – just make them less relevant!